POTENTIAL DOWNSTREAM MARKETS IN EUROPEAN ANTITRUST LAW: A CONCEPT IN NEED OF LIMITING PRINCIPLES

Transcription

1 Volume 7 Number 2 Fall 2011 POTENTIAL DOWNSTREAM MARKETS IN EUROPEAN ANTITRUST LAW: A CONCEPT IN NEED OF LIMITING PRINCIPLES John Temple Lang Cleary Gottlieb Copyright 2011 Competition Policy International, Inc. Published in Competition Policy International (ISSN ) Fall 2011, Vol. 7. No. 2. For more articles and information, visit

2 POTENTIAL DOWNSTREAM MARKETS IN EUROPEAN ANTITRUST LAW: A CONCEPT IN NEED OF LIMITING PRINCIPLES Dr. John Temple Lang* ABSTRACT Under European Union competition law, a dominant company has a duty to provide important inputs to its competitors. The leading cases involved vertically integrated dominant companies, which operated both harbors and car ferry companies. They were ordered to give access to their downsteam competitors, the other car ferry companies that needed access to the harbors. In these cases it was clear that there were two markets: a market for the supply of harbor services to ferry companies, and a separate market for the supply of ferry services to travelers. If all the other conditions for a duty to contract are fulfilled, the dominant company cannot avoid the duty merely by arguing that it has never granted access before. This led to the statement that it is enough if there is a potential market for the supply of the input in question by the dominant company, if the other conditions are fulfilled. This phrase has led to arguments by competitors requesting one of several products sold only in combination by the dominant company, or one specific input out of the dominant company s integrated operations, or the dominant company s principal competitive advantage. In some cases competitors have claimed the right to use the dominant company s intellectual property rights, to produce or use the dominant company s products. In all these cases one important question is whether there is in any sense a market for an input that is used by the dominant company in the course of its activities. Since not everything that could be licensed or sold must be licensed or sold, there must be principles limiting the rights of competitors to demand access to the parts of a dominant company s operations that they need. A number of substantive questions, and some procedural questions, arise in such cases. The European Commission s Guidance paper on exclusionary abuses makes it clear that there must be an upstream and a downstream market, but does not discuss or even fully list the other conditions of a duty to contract. This article argues that the potential market phrase means only that it is not a defense to show that the dominant company has never before made a contract of the kind suggested. If there is only one market on which the dominant company sells, a potential competitor has no right to insist on being given access to whatever inputs it needs to compete effectively on that market. Access may be ordered only if an identifiable abuse of the dominant position has been committed. To prove an abuse, harm to consumers, and not only to competitors, must be shown. The duty to contract must be the appropriate remedy to put an end to the abuse. If no duty to contract can be shown, there cannot be a duty to contract on the basis of a tying argument, among other reasons because in tying cases the competitor wants to sell its products to third parties, and complains that tying prevents it from doing so. In the cases discussed here, the competitor itself wants to be supplied, so that it can produce the products that it wants to make. * Cleary Gottlieb Steen and Hamilton, Brussels and London; Professor, Trinity College, Dublin; Senior Visiting Research Fellow, Oxford. Financial support from IBM is gratefully acknowledged by the author. 106 Vol. 7, No. 2, Autumn 2011

3 A number of cases have recently arisen in which competitors have sought access to inputs controlled by supposedly dominant companies to which the dominant companies have never previously given access. Competitors rely on the argument that the inputs could be the subject of a potential market under EU competition law. In some of these cases the dominant company sells a combination of two products that must work together, and the competitor wants to buy or to get the right to produce one of them, for sale together with its version of the other product. In other cases the competitor needs to obtain one specific input from what appears to be unified seamless production or distribution operations of the company that is said to be dominant. In what may be regarded as a third group of cases, the competitor wants the right to use the dominant company s principal competitive advantage, to use it in combination with other inputs already available to the competitor. This article considers the implications of the idea of potential markets in the context of EU competition law principles on the duty of dominant companies to contract. Related questions arise under European competition law when a competitor or potential competitor of a company that is said to be dominant claims to be entitled to a compulsory license of an input consisting essentially of intellectual property rights, in order to use products or services produced by the dominant company. This article also considers some of those questions, in particular those which arise before the validity of the intellectual property rights in question is finally determined. These questions may arise in proceedings for patent infringement brought by the company that is said to be dominant, or in a competition procedure before the European Commission or a national competition authority of an EU or EEA Member State. Some of the questions discussed here arise primarily because some courts that have jurisdiction to decide patent infringement cases have no jurisdiction to decide the validity of the intellectual property rights that are the subject of the proceedings. Corresponding questions arise in procedures before competition authorities, none of which have competence to decide the validity of intellectual property rights. 1 Under certain circumstances, not yet very clearly or fully defined in the judgments of the European Court of Justice in several well-known cases, European competition law imposes on a company that has been found to be dominant a duty to grant a compulsory license of intellectual property rights. 2 If those circumstances do not exist, European competition law imposes no obligation to license (except in standards cases under Article 101 TFEU, which raise different issues, not considered here 3 ), and the conflict between the supposed intellectual property right and European competition law does not arise. National competition law under Regulation 1/2003 may be stricter than Article 102 TFEU, that is, it may impose more onerous obligations on a dominant company than those imposed by EU law. 4 But even in a Member State with stricter rules on unilateral conduct of dominant companies, the issues discussed here are likely to arise. I. POTENTIAL MARKETS The duty to contract is normally considered to arise primarily in situations in which there is an upstream market producing inputs, services, or raw materials, which are then sold to companies for use in a separate downstream market. The original examples were harbor operations that provided harbor facilities to car ferry companies and other transport operations. 5 In such cases the two markets are clearly distinct: they involve different products and services, and the buyers in the two markets are different. These cases, in which the phrase essential facility was first used officially in European competition law, were all cases in which the abuse alleged consisted essentially of discrimination by the harbor operator in favour of car ferry or other shipping companies associated with it. It was not until later that cases arose in which a competitor wanted access to something that the vertically integrated company had never before supplied outside its own group. These cases involved the Commission applying Article 102(b) TFEU (on foreclosure) instead of Article 102(c) TFEU (on discrimination), but the significance of this does not seem to have been fully understood. The Commission paid little attention to abuse of dominant positions until the Discussion Paper was adopted in Cases of first refusal to contract had been approached without an adequate intellectual framework. Vol. 7, No. 2, Autumn

4 The idea of a potential market arose in situations in which it was said that a dominant company had operations which, although at first sight appeared unified, should be analyzed as consisting of an upstream stage producing an input or facility and a downstream stage using the input or facility. 7 Competitors wishing to enter the supposed downstream market, or to obtain advantages for use in that market, argued that the fact that the dominant company in question had never given access to the input or facility to any user not associated with it should not be a defense. The difficulty, of course, is that many companies that are not usually thought of as vertically integrated have operations that consist essentially of producing a raw material, an intermediate product, or a component for incorporation in a final product; combining hardware and software; or selling a complex final product, such as a car, consisting of a great number of components designed, manufactured and assembled in a particular way. Some cases were relatively clear. The fact that one particular dominant harbour operator had never given access to any car ferry company that was not associated with it would not be a justification for refusing access if the other conditions required by Article 102 were fulfilled, because many other harbour operators do so (and also because the two markets are so clearly distinct). But if no company resembling the supposedly dominant company had ever given access to outside interests anywhere in the world, and if the operations producing the supposed input had never been considered separate or downstream from the rest of the company s activities, it was not easy to see what principles, if any, should be applied. A) IMS HEALTH The facts of the IMS Health case are well known, and have garnered much commentary. 8 IMS Health had compiled a specialized map of Germany designed to relate the places where pharmaceutical products are prescribed to the places in which they are bought. Pharmaceutical companies used this map to estimate the effectiveness of their sales representatives, who talk to doctors and hospitals, and not to the patients who buy the medicines. The sales data analyzed using this map were available to any company that wanted them, but NDC Health, a competitor, complained that the map was copyrighted and that the pharmaceutical companies preferred the IMS map to any other. IMS Health had never given a copyright license to anyone. The question was whether it could have any obligation under what is now Article 102 TFEU to do so. Advocate General Tizzano first recalled that in RTE-ITP 9 and Bronner 10 the supposedly dominant companies had never previously sold or licensed the input requested separately. He said, Thus in applying the case law cited on the refusal to grant a license I consider it to be sufficient that it is possible to identify a market in upstream inputs, even where the market is a potential one only, in the sense that operating within it is a monopoly undertaking which decides not to market independently the inputs in question (notwithstanding that there is an actual demand for them) but to assert exclusive rights over a downstream market by restricting or eliminating all competition on that market. To take a classic example of the essential facility doctrine, it is instructive to consider the case where access to a port is indispensable in order to be able to provide maritime services in a given geographical market. For the purposes of such a case it may be assumed that the owner of the port uses that infrastructure on an exclusive basis in order to secure a monopoly over the market for maritime transport services refusing without any objective justification to provide the necessary port services to arms -length undertakings... In such a case the case law on the refusal to grant a license must apply irrespective of the fact that the port services are not offered on the market... by its conduct it would be eliminating any competition on the secondary market. 11 Tizzano continues: Since... in order to be able to identify a market for upstream inputs it is not necessary for them to be marketed independently by the undertaking controlling them... [S] uch a market may always be identified where (a) the inputs in question are essential (since they cannot be substituted or duplicated) to operating on a given market (b) there is an actual demand for them on the party of undertakings seeking to operate on the market for which those inputs are essential. 12 He goes on to say that there is no duty to license when the competitor plans only to produce goods or services duplicating those of the dominant company.the Court of Justice said, 108 Vol. 7, No. 2, Autumn 2011

5 It appears therefore, as the Advocate General set out in points 56 to 59 of his Opinion, that, for the purposes of the application of the earlier case law, it is sufficient that a potential market or even a hypothetical market can be identified. Such is the case where the products or services are indispensable in order to carry on a particular business and where there is an actual demand for them on the part of undertakings which seek to carry on the business for which they are indispensable. Accordingly it is determinative that two different stages of production may be identified and that they are interconnected, inasmuch as the upstream product is indispensable for the supply of the downstream product. 13 A paragraph in a judgment in a case under Article 267 TFEU should not be treated as if it were legislation. Judgments in Article 267 cases serve only to answer the specific question that has been asked, in the context of the specific facts from which the question has come before the Court. In Article 267 cases the Court does not usually set out to state the law comprehensively, and certainly not on issues that have not been argued and that do not need to be decided. It seems clear that it would be too simple, and indeed unjustifiable, to suggest that there are only three conditions for a duty to supply. These three conditions, (1) two interconnected stages of production; (2) indispensability; and (3) actual demand, would ignore other requirements that are equally well established in the case law of the Court. It would be surprising if every input that resulted from a first stage of production could be demanded by any competitor or complainant who needed the input. B) SUBSTANTIVE QUESTIONS The Commission s Guidance paper14 on the Commission s enforcement priorities in applying what is now Article 102 TFEU says that, Typically competition problems arise when the dominant undertaking competes on the downstream market with the buyer whom it refuses to supply. The term downstream market is used to refer to the market for which the refused input is needed... This section deals only with this type of refusal. 15 Commission will regard a refusal to supply case as a priority if: (1) the refusal relates to a product or service that is objectively necessary to compete effectively on a downstream market; (2) the refusal is likely to lead to the elimination of effective competition on the downstream market; and (3) the refusal is likely to lead to harm to consumers. 16 Although the Guidance paper clearly does not exhaustively list the conditions that are required for a refusal to contract to be contrary to Article 102, it is convenient to begin by discussing the conditions discussed in the Guidance paper. 17 C) THE EXISTENCE OF A DOWNSTREAM MARKET: TWO PRODUCTS AND TWO STAGES OF PRODUCTION The typical case involves a vertically integrated company that supplies an input for its own downstream operations, and is then also asked to supply the same input to a potential competitor of the dominant company s downstream operations. There must therefore be both a market for the supply of the input and a distinct market for which that input is necessary. The Guidance paper identifies the possibility of an abuse even if the product or service refused has never been traded, if there is a potential market. 18 This phrase requires explanation. The Court in IMS Health 19 did not need to explain it, because it was writing only in the specific context of that case, but the Commission should have done so, as the Guidance paper is intended to be generally applicable. Almost anything can, in theory, be leased, licensed or sold, and therefore anything might be a potential market. Any owner of moveable or immovable property could sell, license or lease it, if it made sense for it to do so, but this cannot mean that there is a potential market for competition law purposes in every item of property in all circumstances. The mere existence of a demand cannot automatically create a duty to supply. If it did, the greater the competitive advantage given by the input in question, the greater would be the duty to supply it and share it with competitors, which would be irrational. Thus limiting principles are needed to identify true potential markets. 20 Having established that it is dealing only with two market situations, the Guidance goes on to say that the Vol. 7, No. 2, Autumn

6 The Court s words two different stages of production are helpful. There must be two separate and identifiable stages, rather than a continuous process. There must be an identifiable product or service at the end of the first stage that could be and usually is sold or licensed separately. But the law must also answer the question of how to treat situations in which two components are produced simultaneously and then put together and sold in combination. It would be irrational if there were a duty when the stages were consecutive, but not when they are simultaneous. The way that the manufacturing process is organized can hardly be the crucial question. Also, it cannot be enough that the end of the first stage is an intellectual property right. If it were enough, dominant companies would always be obliged to license all their intellectual property rights to every competitor that needed them, which could not be correct. A more precise or more limited concept is needed of the kind of input that can be a potential market. The key issue, it is suggested, is whether it would make sense that is, whether it would objectively be economically rational for the owner of the input requested, in the context of the business in which the owner is engaged and the use that it is making of the input, to sell it or license it to third parties. It may be rational to share the cost of an upstream facility, even with downstream competitors, particularly if the capacity of the facility is greater than is needed for the dominant company s downstream operations, or if the product to be sold or licensed is a by product ancillary to the main activities of the company. 21 It is not normally economically rational for a company to supply an asset that is used in its business to a horizontal competitor, that is, a direct competitor in the same market. A downstream market is needed for Article 102 to apply in refusal to supply cases because the dominant company s operations must consist of two separate stages: the supply of the input that is required, and its use to provide other, different, products or services to other buyers. In such situations the refusal may enable it to monopolize the downstream market. If a company operates in only one market and has only one unbroken manufacturing process, however complicated, and only one product or set of products, there is no meaningful sense in which there is a potential market for sharing its assets or inputs with its direct competitors. Common sense and case law confirm that there might be a potential market for sharing a byproduct of the dominant company s principal activities, or sharing the use of a facility with spare capacity, but not its most important inputs. In RTE-ITP, the information needed by the magazine was an incidental result of the television broadcasting, not the television companies main activities. The information needed could be easily provided (and indeed, was being provided to daily newspapers) because the Magill magazine was in a market entirely different from that for television broadcasting. 22 In Microsoft, 23 the information that it was ordered to provide concerned only interoperability, and not the core functions of the Microsoft products. Because there is no duty to supply or license if there is no separate downstream market, a complainant needs to prove that the supposedly dominant company s operations consist of two parts. That situation might arise in a case not considered by the Guidance paper, in which the dominant company is horizontally integrated, producing two products or services that are linked to one another, and sells them both to the same buyers. Suppose that these two (or more) products or services are both needed by users for simultaneous use: neither works without the other. And suppose that the complainant plans to provide its version of one of these products, but wants to buy the other from the dominant company, or get a license to produce the latter product, using the dominant company s technology. Again, the key question is whether there is in any sense a separate market for the latter product when it is produced by the dominant company. The answer seems clear. It is not normally economically rational for a company that sells a combination of two products to its customers to sell one of them to a competitor (or to license the competitor to produce it) merely to allow the competitor to combine it with the competitor s own version of the other product. That would make sense only in the context of a joint venture, or if the supposedly dominant company had a shortage of production capacity, or in anticipation of a merger. 110 Vol. 7, No. 2, Autumn 2011

7 So a horizontally integrated company is not in a situation essentially different from that of a vertically integrated company for competition law purposes, in this respect. What may be another way of arriving at the same conclusion is to say that a duty to contract may not be imposed, even if the dominant company is vertically or horizontally integrated, if it would oblige the dominant company to share its principal competitive advantage and to lose its incentive to invest in the asset or input being shared. 24 It could not be right to say that a competitor has a right to select the dominant company s principal competitive advantage or its principal asset and insist on getting the right to use it. That would mean that competitors would have the right progressively to take away the dominance of the company in question, which Article 102 clearly does not allow. This seems to be a more useful test than trying to analyze the stages of production in the dominant company s operations. 25 This approach is confirmed by considering the enormous difficulties of devising an appropriate payment if a dominant company s principal advantage was being shared on a compulsory basis, initially with one competitor, later perhaps also with others (because of the duty not to discriminate). How much difference would it make if the only input needed was a license of an intellectual property right? Since the economic significance of a license would be to enable the complainant to use an asset or technology owned by the dominant company, the fact that formally only a license would be required would be unimportant. The license would simply be the means of giving access to the asset or technology in question. Apparently similar issues can arise in the pharmaceutical industry with compound medicines, which are medicines that consist of two effective ingredients taken together. A complainant producing one ingredient may claim that the other ingredient is an essential facility, and is therefore needed to enable it to produce the compound medicine. However, a distinction must be drawn between the case where a complainant wants supplies of a single product that is already produced and sold by the dominant company, and cases in which it wants a part of the dominant company s product or production process which is not sold separately, and for which there is therefore at first sight no identifiable market in existence. The mere fact that the dominant company sells a combination of two products and that a rival is able to produce only one of them is not an abuse, and no order to contract can be made. A fortiori, it is not an abuse for a dominant company merely to refuse to share an asset or other part of its overall operations just because the competitor is unable to obtain the part it needs for its own activities. The conclusion suggested is that if the potential market concept merely means that it is not a defense for a dominant company to show that it has never granted a license before, it is certainly correct. This is what the Advocate General said in IMS Health. Yet if the phrase is thought to mean more than that, it is hard to see what it could mean, and some limiting principles would clearly be needed. Any other meaning would be inconsistent with legal certainty. II. ELIMINATION OF EFFECTIVE COMPETITION In theory, if there is no downstream or other separate market for which the product or service is an input, the second condition stated by the Commission the elimination of effective competition in that market does not arise. It is nevertheless useful to analyze the connection between the refusal to license and competition. The refusal to supply or license may eliminate all competition from the complainant, if the input truly is essential to its operations. But the dominant company may be exposed to competition in the market in which it sells, even if that market is for the combination of two products, from other companies that produce them both. The question in refusal to license cases is not whether competition from the complainant is eliminated by the refusal, but whether all competition from all sources is eliminated. 26 If other companies individually or together produce, or have access to, the input that is said to be essential for the complainant, or to satisfactory alternative inputs, it is clear from the Bronner judgment that there is no duty to contract. 27 A dominant company is never obliged to remedy weaknesses in an individual competitor s business plan unless the dominant company has caused those weaknesses in some way. Vol. 7, No. 2, Autumn

8 If there is clearly only one market on which the dominant company sells, and there is no competition in that market, a potential competitor has no right to insist on being given access to whatever inputs it needs to compete effectively in that market. This is obvious, once it is stated. But its omission in the Commission s Guidance paper makes its conclusions seriously incomplete. It is well-established in the EU case law that it is not an abuse to refuse to license an intellectual property right: there must be some additional abusive conduct, a separate abuse. 28 This is so even if the effect of exercising the intellectual property rights is the creation of a monopoly. The fact that there will be no competition if a license of intellectual property rights is refused is not additional abusive conduct, nor is it an exceptional circumstance justifying an order to license, as mistakenly determined by the Commission in its IMS Health interim measures decision. A) HARM TO CONSUMERS DUE TO THE REFUSAL Article 102(b), which is the principal and probably the only legal basis for the prohibition of foreclosure and exclusionary abuses (as distinct from discrimination cases) expressly applies only if there is harm to consumers. It is not sufficient for the complainant to claim that if it got a license or a contract, there would be one more competitor. If that were enough, there would always be a duty to license, which runs counter to established law. To say that one more competitor would be enough to justify a compulsory license would be to look only at static competition. In all refusal to contract cases, it is is essential to look at dynamic competition. 29 Any duty to contract inevitably has implications for the incentives for further investment of both the dominant company and the companies with which it may be obliged to contract. It discourages the dominant company from investing, since the company will fear that success will require sharing the fruits of its investment. A duty to contract also discourages the companies contracting with the dominant company from investing, because such companies no longer need to invest in developing alternatives; instead, they can free-ride. An important finding by the Commission in the Microsoft case was that compulsory disclosure of interoperability information would not reduce the incentives of Microsoft to invest, since Microsoft was obliged to disclose only the information needed for interoperability, and could continue to develop its systems. Nor would disclosure reduce the incentives of other companies to invest, because they would continue to be under competitive pressure from Microsoft and rival firms. 30 Several of the leading judgments have considered whether the complainant can show that it plans to produce a new kind of product or service for which there is a clear and unsatisfied demand, which the dominant company is unable or unwilling to produce. This was the situation in the RTE-ITP case, involving an integrated weekly television programs guide. 31 It was not the situation in Bronner 32 or in IMS Health. 33 If the complainant can make such a showing, the harm to consumers caused by preventing the development of the new kind of product is sufficient to constitute an abuse, provided the other conditions are met. However, if the complainant plans to produce only a combination or a product that is essentially a copy of the dominant company s product, there is insufficient harm to consumers. Similarly, if there is no scope for non-price competition in the downstream market, there is no justification for a duty to contract. Harm to consumers must always be proved under Article 102(b) TFEU if the abuse consists of foreclosure or exclusion of a competitor. Yet it is important to recognize that harm to consumers, if it is serious, may be enough to create an abuse. So in RTE-ITP, the mere refusal to provide television program information was an abuse, because it made it impossible to provide consumers with a product for which there was a clear and unsatisfied demand. 34 B) ARTICLE 102(b) TFEU: FORECLOSURE AND EXCLUSIONARY ABUSES Article 102(b) TFEU prohibits conduct limiting the production, markets or technical development of competitors35 of the dominant company, if consumers are harmed. This is the Treaty definition of foreclosure and exclusionary abuse. Similarly, the Court in Microsoft said that this clause is not limited to cases involving a new kind of product, but also applies when, in effect, the dominant company s conduct imposes a permanent handicap on its competitors Vol. 7, No. 2, Autumn 2011

9 The Court in the GlaxoSmithKline case 37 under Article 102 TFEU also relied on Article 102(b). If this handicap limits competition in a market for a new or improved product that competitors were already producing (or would produce, if the evidence that they would do so is strong enough), and which they would be under continuing competitive pressure to improve, there may be an abuse. It seems clear that a dominant company never has a duty to share, or part with, its principal competitive advantage, since that would deprive both it and its competitors of their respective incentives to invest and innovate. But it is nonetheless difficult, if not impossible, to visualize an abuse for which the appropriate remedy would be an order to share the dominant company s principal competitive advantage. An instance in which such a permanent handicap would be imposed is if a dominant company regularly makes changes in its products that causes them to work unsatisfactorily with competitors products, and then refuses to provide new interoperability information promptly. This was found to be the situation in the Decca Navigator case, 38 and was thought to be the situation in the original IBM case brought by the European Commission. 39 Similar handicaps were imposed, according to the Commission, by AstraZeneca on its generic competitors by the withdrawal of the listings for some of its patents. 40 C) NO DUTY TO CONTRACT WITHOUT AN IDENTIFIABLE ABUSE Although it has been insufficiently emphasized by both the Commission and the Court, it is important to note that Article 102(b) can impose a duty to contract only when an abuse has been committed. 41 It prohibits only conduct creating a handicap or difficulty to which the competitors would not otherwise be subject. It does not create a duty to help competitors to overcome difficulties not caused or increased by the conduct of the dominant company. It is not illegal foreclosure merely to refuse to help a competitor. In Bayer 42 the Court said: Under Article [102], refusal to supply, even where it is total, is prohibited only if it constitutes an abuse. The case law of the Court indirectly recognises the importance of safeguarding free enterprise when applying the competition rules of the Treaty where it expressly acknowledges that even an undertaking in a dominant position may, in certain cases, refuse to sell or change its supply or delivery policy without falling under the prohibition laid down in Article [102]. This failure to distinguish between free enterprise and abuse is one of the most important omissions from the statements made by the Court in IMS Health 43 and by the Commission in the Guidance paper. It is elementary, and it should be obvious, that Article 102 TFEU applies only when an abuse has been committed. No compulsory license or other remedy can be ordered under Article 102 TFEU unless an identifiable abuse has been proved. There is no duty to license merely to create one more competitor. It is not an abuse to refuse to license merely because there may otherwise be no competition in the short term, because that may often be the result in cases involving intellectual property rights. If the dominant company has done nothing to make the market less competitive, it cannot be ordered to make it more competitive, and obtaining intellectual property rights for one s own inventions does not make the market less competitive. If the dominant company has done nothing to create a handicap or difficulty for competitors to which they would not otherwise have been subject, there cannot be a duty to contract. In other words, anticompetitive foreclosure must be proved before any remedy can be ordered, and the mere refusal to help a competitor is not anticompetitive. Intellectual property rights cases, more so than in any other kind of case, recognize that the mere refusal to license a property right is not an infringement of Article 102 TFEU. There must be some additional abusive conduct 44 that constitutes a distinct and separate abuse, distinct from, and in addition to, the refusal to license. D) A DUTY TO CONTRACT ONLY AS A REMEDY FOR AN IDENTIFIABLE ABUSE This important and undeniable principle suggests another and better approach of looking at the case law that goes far to put everything into perspective. The fist question to ask is whether an abuse exists. Vol. 7, No. 2, Autumn

10 Once an abuse has been identified and proved, it is easier to answer the next question, which is whether a duty to contract whether to sell, license or lease would be the appropriate and proportional remedy for the abuse in question. This explains RTE-ITP, 45 Commercial Solvents, 46 and the discrimination cases. It entirely avoids the insuperable difficulties of basing all crucial distinctions on the nature of the stages in the production process. There are a number of arguments based in law, economics and policy for this approach, which cumulatively are extremely strong: 47 - This approach is based on the express words of Article 102(b): limitation (of the possibilities of rivals) and prejudice to consumers. Conduct which limits possibilities of rivals only in ways in which they would be limited anyway cannot be illegal. Rivals are already limited by having to respect intellectual property rights. The approach involves no new rules or concepts. - It provides a rational, coherent and comprehensive basis for the relevant legal and economic principles, which should be broadly acceptable to competition lawyers and economists, and to intellectual property lawyers. - It confines the concept of abuse under Article 102 to the three correct, useful and traditional categories under European competition law: exploitative abuses (Article 102(a), foreclosure of competitors (Article 102(b)), and unjustified discrimination between companies not otherwise associated with the dominant company (Article 102(c)). - It seems reasonable to say that an abuse always involves some conduct of the dominant company. Mere inaction is not an abuse. Therefore a remedy must offset or eliminate the consequences of some positive action. - It answers the following two questions: what additional abusive conduct is enough? If refusal to give access is only illegal when linked to such conduct, why not simply prohibit the separate abuse? The answer is that a compulsory license, when appropriate, is a more effective remedy. - It avoids the insuperable difficulties of balancing the incentives to invest of the dominant company and its downstream competitors in the future. The Court in Microsoft carefully avoided undertaking this task, and it seems wise to avoid it. - It harmonizes the interpretation of Article 102 TFEU with the well-established duty of parties to patent pools, joint ventures and standard setting agreements to license essential patents to non-parties.48 - It encourages use of a market-based remedy requiring little competition law supervision. - It states a rule with built-in limiting principles, which are needed because of the vagueness and potentially broad scope of the concept of potential markets. There would be no new concept of abuse and, as in the case of any other remedy for an abuse under Article 102 TFEU, the remedy must be an appropriate, proportionate and effective remedy to put an end to the abuse. The question of the appropriateness of a remedy arises on any view of the law. A remedy must be enough to put an end to the abuse effectively, but go no further. - It provides a basis for distinguishing three types of cases from each other. The first is where the dominant company developed the property itself, when normally no duty arises to give a first license, and there is no duty except under Article 102(c) TFEU. The second category of cases is when a dominant company acquired the property and then deprived its competitors of access to it. In this group of cases, a duty to license is appropriate if the dominant company is substantially restricting competition. The third group is dynamic competition cases, where the dominant company harms consumers by foreclosing potential competition to protect itself against technical development or against a new kind of product for which there is a clear and unsatisfied consumer demand. - It gives the phrase additional abusive conduct a clear meaning, that of abuse. - It confirms that, in principle, it is never illegal in itself to refuse to license an intellectual property right, as the Court has repeatedly affirmed It has the important advantage of avoiding consequences contrary to policy. It would not lead to protecting competitors rather than competition, using competition law for regulatory purposes, or discouraging investment or innovation. These are serious risks to which European Union law has been exposed in recent years. 114 Vol. 7, No. 2, Autumn 2011

11 - It provides a rational basis for saying that a dominant company has no duty to facilitate companies which wish to copy, add on or imitate devices, unless it has taken steps to exclude them or create difficulties or handicaps for them. - It allows a variety of justifications for refusal to license (including the defense that the dominant company will soon produce the new kind of product itself ). - It seems to be an approach on which European and US law could agree. This is important because it is often said that intellectual property rights are an area on which the two jurisdictions diverge It allows a distinction to be drawn between a compulsory license in a single market situation which can be appropriate only if the abuse is in that market and which requires a very strong justification (since it would lessen dominance, as distinct from ending abuse) and a compulsory license in a second distinct market, which is more likely to be proportional. - It does not involve trying to use competition law to correct any defects which may be thought to exist in intellectual property law It provides a relatively uncontroversial rationale for the results in RTE-ITP52 and Microsoft As Mr. Justice Laddie said in Philips Electronics v. Ingman and Video Duplicating, The existence of the intellectual property rights may facilitate anti-competitive behaviour, but such behaviour consists of abusive interference with the market for a product... In prohibiting the conduct the court may have the power to intervene in the manner in which the intellectual property rights are exploited by the proprietor. This is to ensure that the proprietor does not continue the abusive conduct in relation to the products by the back door route of using the intellectual property rights. 54 In short, a refusal to contract or to license is never an abuse in itself, but a duty to contract may be the correct remedy for some other abuse, once the abuse has been identified and proved. All the cases in EU law in which access has been ordered have involved identifiable abuses. The abuse, once identified, and the duty to contract must be related in some way. The only way in which they could be related is when the duty is a remedy to end the abuse. Imposing a duty to contract, even if no abuse had been committed, merely to create more competition, would be a regulatory rule unjustified by competition law principles. This approach has another advantage. It largely avoids weighing up the effect of imposing a duty to contract on the incentives to innovate of the dominant company and of the competitors. Under this approach, such an inquiry arises only when the competition authority is considering whether an order to contract is proportional. It is easier and more appropriate in a judicial context to answer that question than to try to weigh up what sounds like a policy question of the relative importance of the two sets of incentives in the future. 55 E) ACQUIRING THE ONLY EFFECTIVE ALTERNATIVE TECHNOLOGY Two cases in which a duty to contract may be appropriate, but which fall outside the types of cases discussed above, should be mentioned. The principle that a duty to contract must be the appropriate remedy for an identified abuse is illustrated by a situation in which a dominant company acquires the only effective technology which is an alternative to its own technology, or the only useful alternative input, and the acquisition is an abuse. 56 Competition, or potential competition, is suppressed. The dominant company may wish to suppress the alternative technology, or to use it to strengthen its own dominance. Even if the alternative were not used, its existence might constrain the dominant company, provided that it was owned by a non-associated company. So if a dominant company acquires the only significant alternative technology, the appropriate remedy is to order the company to sell or license it to a direct competitor. The dominant company might also need to be ordered not to use it for its own purposes. F) LIMITING SUPPLIES IN ORDER TO RESTRAIN PARALLEL IMPORTS In the GlaxoSmithKline judgment 57 under Article 102 TFEU, the Court held that a dominant supplier of medicinal products was not entitled to refuse to meet ordinary orders from wholesalers in order to prevent parallel imports into higher price countries. Vol. 7, No. 2, Autumn

12 The dominant supplier could only refuse to meet orders that are out of the ordinary in terms of quantity. It could therefore be ordered, if necessary, to supply ordinary quantities, on the grounds that a refusal to sell would limit markets to the prejudice of consumers and would amount to discrimination that might ultimately eliminate a trading party from the market. III. ARE THERE DIFFERENT RULES FOR INTELLECTUAL PROPERTY AND OTHER KINDS OF PROPERTY? The question arises whether there are different legal rules on the duty to contract for intellectual property. The basis for such a distinction rests on the Court s repeated statement that a refusal to license an intellectual property right is not an abuse, and that there must be additional abusive conduct if there is to be a duty to license. The Court has not been required to articulate what differences, if any, there may be for other kinds of property. It is understandable that the Court s comments concerned only intellectual property rights, since they formed the subject of the cases involving first refusals to contract. 58 Intellectual property rights create legal monopolies (though not necessarily economic monopolies), and it is obvious that if there were always a duty to license an intellectual property right that created a legal or an economic monopoly, the rights given by intellectual property legislation would be completely transformed into mere rights to royalties. The Court thus needed to say that refusal to license such a right was not, in itself, an abuse. But that left unanswered the question whether corresponding rules apply to other kinds of property. This question is easier to answer in the light of the fundamental rule explained above, that there is never a duty to contract or license unless it has been proved that an identifiable abuse, contrary to Article 102 TFEU, has been committed. If the abuse is discrimination, contrary to Article 102(c) TFEU, the duty to end the discrimination may involve a duty to grant access on the same terms as those on which access has already been given. In this respect, there is no reason to differentiate between intellectual property and other kinds of property. 59 Cases of first refusal to give access to property or inputs other than intellectual property rights are unusual, simply because other kinds of property or inputs do not usually involve anything resembling a monopoly. But Commercial Solvents 60 and Bronner 61 did involve what were said to be monopolies, and RTE-ITP involved a monopoly of the television program information (and only incidentally a copyright). 62 In Bronner the Court held that there was no duty to contract because the complainant had not proved that no alternative economic distribution system could be set up, 63 but the judgment seems to imply that if no other system were possible (and if the other conditions for a duty to contract were fulfilled), there would have been foreclosure, and a duty to contract. In Commercial Solvents 64 and RTE-ITP 65 the Court held that abuses had been committed, and although the words were not used, it is easy to see that in each case they were foreclosure or exclusionary abuses. In Microsoft 66 the relevant duty was to provide the information needed for interoperability and, as in RTE-ITP, the intellectual property right was merely incidental. 67 There is nothing in any of these judgments to suggest that a refusal to give access to any kind of property, input or service can be an abuse in itself, without proof of any other abuse. Almost all the reasons outlined above for saying that a refusal to license an intellectual property right is not in itself an abuse apply also to refusals to give access to all other kinds of property. The conclusion therefore is that intellectual property is not a special case, and that the rules discussed here apply equally to all kinds of property and inputs. Certainly, as far as potential markets are concerned, it is equally appropriate to use the concept in connection with both kinds of property. Intellectual property rights are no more or less easily sold or licensed than other kinds of property. When the supposed abuse is foreclosure rather than discrimination, Article 102(b) TFEU does not suggest that different kinds of property should be differently treated.68 Mere ownership of property, normally giving the dominant company an exclusive right to use it, is not an abuse, because it does not limit the markets, production or technical development of competitors. 116 Vol. 7, No. 2, Autumn 2011

13 IV. TERMINATION OF EXISTING SUPPLY ARRANGEMENTS In cases involving termination of existing supply arrangements, since the dominant company has already supplied or licensed in the past, there are two stages in the production chain, and there is no need for an analysis of potential markets. Previous contracts show that there is both a market for the supply of the input and a market where that input is used in a distinct product. The Commission s Guidance paper says that the Commission will apply the same criteria in cases of termination of existing supply arrangements as in cases where the dominant company refuses to supply a good or service which it not previously supplied to others. 69 It adds, however, that the termination of an existing supply arrangement will more likely be found an abuse of a dominant position than a de novo refusal to supply. The Guidance paper gives two unconvincing reasons for treating a termination of existing supply more strictly than a de novo refusal to supply. First, the company previously supplied could have made relationship-specific investments. This argument cannot be accepted, since it is not a competition law consideration, but a commercial or contractual one. Termination of supply could be a breach of contract and the contracting party could request damages for its investments, but this does not mean that it is necessarily easier to find an abuse from a competition law perspective. The second argument in the Guidance paper is that in the past, the owner of essential input has found it in its interest to supply. According to the Commission, this indicates that supplying the input does not imply any risk that the owner receives inadequate compensation for the original investment. The argument of inadequate remuneration for the dominant company could be a justification for termination, if it was objectively shown, but it does not explain why termination would be illegal in the absence of inadequate remuneration. The mere fact of having supplied once cannot create a duty under competition law to continue supplying indefinitely. Under competition law, the effects of the termination on competition and on consumers should be the criteria for assessing whether or not the termination constitutes an abuse of dominance. These cases can arise under Article 102(b) TFEU (foreclosure) or 102(c) TFEU (discrimination). If the complainant is the only one cut off from supplies, there may be discrimination. If everyone is cut off, there may be foreclosure on the downstream market. There may be ill effects for justifications for competition and for consumers, but whether the termination is justified will depend on the dominant company s reason for the termination. Certainly, it should not be presumed that a refusal to supply is an abuse merely because a contract has been made already, as the Commission seems to believe. Such a result implies that a dominant company could be locked into a contractual arrangement. This would discourage such a company from supplying in the first place, which would be damaging to the economy. 70 There are, however, some differences between de novo refusal to deal cases and termination of supply cases. A) ELIMINATION OF EFFECTIVE COMPETITION FROM STOPPING SUPPLY Clearly, existing competition is different from potential competition. If the dominant company stops supplying a player in the downstream market, there will be one fewer competitor on that market, if the input is essential and there is no other source of supply. It could be harder for the dominant company to prove a valid business justification for the termination of the supply than it would be in cases of a de novo refusal to deal, since the dominant company found it economically rational to supply the complainant in the past. But keeping an inefficient competitor in the market, or mere duplication or imitation of an existing product, is not sufficient to create a duty to resume supplies. The fact that it is sometimes pro-competitive to deal with a competitor does not mean that to stop doing so is necessarily anti-competitive. Vol. 7, No. 2, Autumn